Navigating the wave of lower interest rates

Given the strong market expectations for a Federal Reserve rate cut, as indicated by the CME data with a 57% chance for a 25-basis-point reduction and a 43% chance for a 50-basis-point cut in September, investors are poised to reconsider their strategies.

With the Fed's September meeting likely to deliver a rate decrease, the question arises: how should investors allocate assets during an interest rate cut cycle? Let's delve into the tactics and considerations for optimizing your portfolio in this anticipated low-interest-rate environment.

For investors open to higher risk with the potential for greater returns, sectors significantly impacted by interest rate fluctuations, such as biotechnology, consumer discretionary, and technology industries, may be worth exploring.

Let's take the biotech sector as an example. The biotech sector depends a lot on the Fed's interest rates. These companies are often small and rely on high-risk drug development, and need money to support their risky projects. Low interest rates help them get cheaper loans, which is crucial for their growth.

How has the biotech sector performed during historical interest rate cut cycles? According to a Morgan Stanley report, the biotech sector usually performs better than the market before the first interest rate cut, but then doesn't perform as well for about a month after. After that, it typically starts to rise again, often increasing by about 20% to 30% over the next 6 to 12 months. While investing directly in biotech stocks is popular, ETFs can help reduce some of the risks.

Here are some common biotech ETFs we often see.

U.S treasury bonds are commonly viewed as stable investment option, as bond prices are inversely related to market interest rates, typically bringing better returns during rate cut cycles. Bonds generally have low volatility and could be an option for those seeking long-term stability in their returns.

Gold is a popular safe-haven asset that is affected by interest rates as well. When U.S. interest rates go up, more money flows into the U.S., strengthening the dollar. This may lower gold prices. When rates go down, some money leaves the U.S., weakening the dollar, which may boost gold prices. Since gold is priced in dollars, a weaker dollar often means higher gold prices. However, gold prices are also influenced by other factors like its value as a financial asset, a commodity, and a safe investment.

Moomoo now supports a variety of thematic ETFs, and the heatmap function can help us identify potential targets within industries of interest.

– Interest rates are just one of many factors that influence the prices of various assets.

– Additionally, as mentioned earlier, the market is currently optimistic about the expectation of rate cuts. If the Federal Reserve's rate cuts fall short of expectations, it could lead to a decline in these asset prices.